Ownership and firm innovation in a transition economy: Evidence from China

We examine innovation performance of firms in a transition economy from an ownership perspective. We focus specifically on the relationship between ownership structures and firm innovation performance. Drawing on data from 548 Chinese firms we find volume of patent registration to be most strongly influenced by foreign ownership in the firm along with firm affiliation within a business group. The influence of state and institutional ownership on innovation performance is positive but lagged. Contrary to expectations, insider ownership leads to lower innovation performance and concentrated ownership has no significant impact. Our study has two principal contributions. Firstly, we utilize a comprehensive treatment of ownership characteristics, overcoming weakness in previous studies that have used a more narrow focus on ownership type. Secondly, we contribute to understanding of how firms in transition economies build ‘indigenous’ capabilities for innovation by drawing attention to the interplay of foreign and domestic control of agents’ innovation.

Research highlights
► We examine the relationship between ownership structures and firm innovation performance in China in the period 2001–2004.
► Results indicate that firm innovation performance is associated with the presence of foreign owners in the firm, as well as with the firm's affiliation to a business group.
► The influence of state and institutional ownership on innovation performance is positive but lagged.
► Insider ownership leads to lower innovation performance and concentrated ownership has no significant impact.